Transcript What Is Strategy ? (by Michael Porter )

What Is Strategy?
(by Michael Porter)
What is Strategy?
Author : Michael Porter
Professor, Harvard Business School
- Director, Institute for Strategy and Competitiveness
Key Contribution
- 5 Forces, Value Chain, Generic Strategies,
Positioning, Cluster of Competence
Competitive Strategy
Major Work
-
"How competitive forces shape strategy", (HBR, Mar/Apr 1979)
Competitive Strategy (Free Press, 1980)
Competitive Advantage (Free Press 1985)
"From Competitive Advantage to Corporate Strategy", (HBR, May/June 1987)
"What is Strategy", (HBR, Nov/Dec 1996)
"Strategy and the Internet", (HBR, Mar 2001)
Table of Contents
Operational
Effectiveness Is Not
Strategy
Strategies Rests on
Unique Activities
A Sustainable Strategic
Position Requires
Trade-offs
Fit Drives Both
Competitive Advantage
and Sustainability
Rediscover Strategy
1. Operational Effectiveness Is Not Strategy
Critique:
“Positioning – once the heart of strategy - is rejected as too static for today’s
dynamic markets and changing technologies”
Why:
Rivals can quickly copy and market position, and competitive advantage is, at
best, temporary  No Position  No Uniqueness
So… Adopt New Trends of Management Tools
Total Quality Management
Benchmark
Time-based Competition
Outsourcing
Reengineering
Change Management
Porter Argues ..
Quest for…
•Productivity
•Quality
•Speed
Operational
Improvements
Operational Improvements
“Why” is dangerous half-truths (His counter arguments to follow on)
“New rules and tools”  mutually destructive competition/ “Hypercompetition”
1. Operational Effectiveness Is Not Strategy
Unchanging Dogma in Market
Establish difference and preserve  Outperform rivals
Deliver greater value / Comparable value at lower cost / Both
Superior Profitability
- Greater Value  Higher unit prices
- Greater efficiency  Lower average unit cost
Key Factors in Differentiating Companies
Cost (Spend)
Activities (Do) – Value addition
Price (Harvest)
Difference between OE and
Strategic Positioning
OE: Performing similar activities
better than rivals
ST: Performing different activities
or similar activities different ways
1. Operational Effectiveness Is Not Strategy
Productivity Frontier
Essence of Operational Effectiveness
Mastered by Japanese Companies in ’80s
- Automobile industry (Honda, Toyota, …)
Lower cost & superior cost at the same
time
Constantly Shifting outward
- New Technologies
- New Management approaches
“Fitness Competition”
Consequence of Productivity Frontier / OE
Improvements gets harder (as activities get leaner)
Hard to sustain advantage (as it can quickly imitated)
Competitive Convergence (Benchmark, O/S)  Merger
Ex: RR Donnelley’s Profit Margin Drop
- 7% (80s)  4.6% (’95)
Diminishing
Returns
2. Strategy Rests on Unique Activities
Strategic Positioning
Type
Suitable when…
Customer
Characteristics
Example Companies
Variety-based
Positioning
Choosing particular
products/ Services
Wide array of
customers
meeting subset of
their needs
Jiffy Lube (Engine Oil
only)
Vanguard Group
(Predictable
performance fund)
Needs-based
Positioning
Choosing particular
segments
Segment of
customers
meeting all/most of
their needs
Ikea (DIY for Working
parents)
Bessemer Trust ( >
$5M Acct)
Access-based
Positioning
Choosing particular
setting
Wide array of
customers
meeting subset of
their needs
Carmike Cinemas
(Cities population
under 200,000)
What is Strategy?
“Strategy is the creation of a unique and valuable position, involving a
different set of activities”
2. Strategy Rests on Unique Activities
Case Study
Southwest Airlines
Activity Attributes
Southwest Airlines
Other Airlines
Travel Distance
Short
Mid ~ Long
Servicing Cities
Midsize Cities
Major Cities
Airports
Secondary in the City
Major in the City
Aircrafts
Boeing 737
Boeing, Airbus, GD, …
Air Fare
Lowest
Expensive
Seating Class
1 Type
First, Business, Economy
Food Service
None
Meal, Beverages
Activity Attributes
IKEA
Typical Furniture Store
Furniture
DIY
Factory Assembled
Design
By IKEA (low-cost, modular)
By 3rd Party manufacturers
Showroom
Fraction of Furniture
All Furniture
Delivery
Right away (by customer)
Days ~ Weeks
Something new
In-store child care, until 9pm
None
IKEA
3. A Sustainable Strategic Position & Trade-offs
Positioning alone is not enough
Repositioning by competitors
Straddling (In actuality, path to destruction)
- Continental Airlines  Continental Lite targeting Southwest Airlines
So… Needs Trade-offs to acquire sustainability
Trade-offs
“Choice thus protect”
Trade-offs arises in 3 aspects
- Image and reputation

Ivory soap – inexpensive everyday soap
- Activities
- Internal coordination and control

Organizational Priority
Ex) Trade-off grounded Continental Lite
- Confusing “Image and reputation”
What is Strategy?
“Strategy is making trade-offs in competing. The essence of strategy is
choosing what not to do.”
4. Fit Drives Competitive Advantage & Sustainability
Differences of Strategy from Operational Effectiveness
OE: Excellence in individual activities
St: Fit in Combined activities
Fit
Company’s activities are interactively augmenting each other to support the
strategic position  Locks out imitators / Living barrier
3 Degrees of fit
Degree of Fit
Description
Example
First-order
Simple consistency
Vanguard in Low-cost strategy
Second-order
Activities are reinforcing
reinforcing
Neutrogena
- Market Hotel
- Hotel allows Neturogena logo on soap
- Guest look for Neutrogena soap in drugstore
Third-order
Optimization of effort:
Coordination
information exchange
Gap’s Short model cycle
- Daily restocking of selections from 3 warehouses
warehouses  minimize in-store inventory
What is Strategy?
Strategy is creating fit among a company’s activities
4. Fit Drives Competitive Advantage & Sustainability
Case Study: Fit of Southwest Airlines
Summary
Operational Effectiveness is not Strategy
It’s tool for productivity acceleration
But it alone destroys a company
Basic Building Block of Strategy
Activities
3 Aspects of Strategy
Position - different set of activities
Trade-offs – choose not to do (No chasing of two rabbits)
Fit – All activities become living organs of a company